Audit concludes Mental Health Trust improperly invested $44M

Sen. Bert Stedman, R-Sitka, wants the leadership and board of directors of the Alaska Mental Health Trust Authority to resign after the results of a legislative audit found violations of state law in its asset management. (Photo/File/AP)

A legislative audit has concluded the Alaska Mental Health Trust Authority invested nearly $45 million in real estate developments over nine years in violation of state law and a court settlement that direct how the authority’s assets are managed.

The audit, dated Feb. 8 but released earlier this month by the Legislative Budget and Audit Committee, asserts the $44.4 million instead should have been transferred to the Alaska Permanent Fund Corp. for management within its $65 billion portfolio.

Legislative Auditor Kris Curtis emphasized in the 126-page report that the authority’s “board of trustees’ actions appear to be well-intentioned, driven by a desire to maximize revenue for use by beneficiaries” of the authority.

“In my opinion there is a cultural issue that exists within the Mental Health structure and I think the entire board along with (CEO) Mike Abbott should submit their resignations,” the typically measured Stedman said in an interview.

The Alaska Mental Health Trust Authority is an independent, state-owned corporation that utilizes its assets to better the lives of its beneficiaries, who are Alaskans with mental health and addiction challenges.

Stedman said the seven trustees — appointed by the governor and confirmed by the Legislature — could re-apply to the board after resigning, at which point the applications would be considered in the light of the audit report.

“You can’t hide behind your mission and claim that your breach of the trust settlement is therefore just. That is laughable,” Stedman said.

A 1994 legal settlement and corresponding legislation directed the state to allocate $200 million for the Mental Health Trust. That money, along with one-time revenues from development activities on Trust land — land sales, oil, gas and mineral extraction and 85 percent of timber sale proceeds — was to be handed over to the Permanent Fund Corp., which comingles the Trust assets with its Fund investments.

From state fiscal years 2009-2017 the Mental Health Trust Authority invested $39.5 million in seven commercial real estate properties in Anchorage, Cordova and the Lower 48 through the Trust Land Office, which is tasked with managing the authority’s roughly 1 million acres of land holdings in the state.

Six of the properties were mortgaged and, according to the audit, portions of those proceeds were used for further real estate investments.

Another $4.9 million was used for land development work mostly intended for beneficiary programs, the audit states.

The authority can use recurring revenue from land leases or easements more liberally.

The $44.4 million came from such one-time revenue streams.

For his part, Abbott noted that he has only been with the authority since November and most of the activity discussed on the audit was prior to his appointment by the board.

Abbott said in an interview that he has no intention of resigning and he was aware of the audit while going through the hiring process last year. He also said he has not spoken with Stedman about the issues.

“I haven’t heard anything yet that made me doubt the motivation of the trustees or their or the staff’s commitment to doing right by the beneficiaries,” Abbott said. “That doesn’t mean that some of what they did wasn’t wrong but I haven’t heard anything that I felt uncomfortable with regarding motivation or intent or anything like that.”

He described the real estate purchases as “the Trust investing in itself.”

Those investments generated several million dollars more than if the money had been transferred to the Permanent Fund Corp., Abbott added.

According to the audit, the seven properties had a collective market value of $98.2 million as of June 30, 2017, with mortgage balances totaling $47.3 million and equity of $50.8 million.

“Regardless of if you over-perform or underperform, it’s not that relevant,” Stedman said. “You’re outside your investment policy and that’s not acceptable; so that’s a weak excuse.”

A letter dated May 1 by authority board chair Mary Jane Michael responding to a draft version of the audit thanks the auditors for recognizing the trustees’ intentions in making the real estate investments, but also states the board continues to believe its investment choices were appropriate and have grown the amount of spendable income available to the Trust.

The board will examine the some of the recommendations made in the audit and if they are deemed to be in the best interest of the beneficiaries they will be implemented, according to Michael.

The recommendations made in the audit that the board will consider are to stop investing in commercial real estate through the Trust Land Office and discuss with Permanent Fund officials on how the current real estate holdings can be transferred to the Fund managers.

Further, the trustees should fund future program-related investments via the Trust’s income account and reconstitute the Permanent Fund Corp. with the principal funds used on the investments to date.

Michael wrote in her response that the trustees would work to revise its asset and resource management policies to incorporate best practices and help the authority comply with state investment laws, as well as implement procedures to ensure the authority complies with state open meetings laws. Those actions were additional recommendations made in the final audit.

The authority has paused similar investments and is in talks with Permanent Fund officials on whether or not there is a way for the corporation to manage the authority’s real estate holdings, Abbott said.

The audit also concludes that draft legislation considered by the authority board in March 2017 to change its authorizing statutes likely would have been in violation of the 1994 settlement.

“Based on the verbatim minutes transcript (of a March 24, 2017 meeting), the proposed legislation was narrowly developed to answer questions in the request for this audit,” the report states. “At the heard of this draft bill was the idea that trustees would have discretion to manage land principal proceeds outside of the (Permanent Fund Corp.).”

Stedman called the trustees “indignant” in their management of the assets and their inability to follow the settlement.

“They deviated from their investment policy, sometimes for several years, and then backed up and changed their policy. They tried to do a similar thing with the Legislature this year by submitting legislation to basically try to legalize what they were doing and that is questionable at best,” Stedman said.

He added that the bicameral Budget and Audit Committee would be formulating its own response to the authority over the coming weeks.

And while Stedman insists statute trumps regulation in the hierarchy of operating mandates, Abbott highlighted that upward of five years ago Department of Natural Resources and Law officials wrote and approved a batch of regulations permitting the authority to make the investments that it did, noting those regulations were only finalized after a process that included public notices and opportunities for comment.

“The trustees believed that their obligation to the beneficiaries and the sort of different authorities they were working under suggested that they had the authority to make the investment choices that they did. It certainly was not a rogue interpretation that the trustees were making,” Abbott said.

He said further that if going forward there is agreement that the authority should not have the ability to make its own investments with Trust principal, that should be clarified and the authority’s behavior will change accordingly.